ch. 12 hw

According to real business cycle​ theory, the economic impact of changing input prices is similar to the economic impact from​ ____________. A. sentiment changes. B. technology changes. C. changes in monetary factors. D. multipliers.

B. technology changes.

In the United​ States, recessions are usually defined as​ ____________. A. two consecutive months of negative growth in real GDP. B. two consecutive quarters of negative growth in real GDP. C. any period of negative growth in real GDP. D. two consecutive quarters of negative growth in nominal GDP.

B. two consecutive quarters of negative growth in real GDP.

The Internet boom of the 1990s transformed the way business is conducted and dramatically increased worker productivity. Using the graph on the​ right, show the effect of the Internet boom on the labor demand curve in an​ economy, including the effects of multipliers. ​1.) Using the line drawing​ tool, show the new labor demand curve prior to the effects of any multipliers. Label your line ​'D Subscript 2​.' ​2.) Using the line drawing​ tool, show the new labor demand curve after the effects of multipliers. Label your line ​'D Subscript 3​.' ​3.) Using the point drawing​ tool, locate the equilibrium point. Label your point​ 'e3.'

The immediate effect is a rightward shift in labor demand from D1 to D2, and after multiplier effect, labor demand further rises from D2 to D3.

If an economic shock decreases labor​ demand, equilibrium employment ____________ and real GDP ____________.

falls falls

Suppose an economy has been growing for the last five quarters. It is more likely to _____________ in the next quarter.

grow

Real _______________ growth tends to be more volatile than real ________________ growth.

investment consumption

The final equilibrium will be a

trough

The pandemic of 2020 affected​ firms' willingness to hire​ workers, initially shifting the labor demand curve sharply to the left. Using the graph​ provided, work out the consequences of this labor demand shift on an economy with a downward rigid wage. ​1) Using the line drawing​ tool, draw the new labor demand curve that reflects the impact of the onset of the pandemic described above. Label the line as ​'LD2​'. ​2) Using the point drawing​ tool, indicate the new equilibrium in the labor market. Label the point as ​'E2​'.

When the demand for labor decreases and supply is constant the wage rate will remains constant and quantity of labour will decline in the market.

The post-recession wage is ___________ the pre-recession wage.

above

Recessions are periods in which the economy ___________​, while economic expansions are defined as the periods _____________.

contracts between recessions

Some of the variables tracked by the index​ are: i. The average weekly hours worked by manufacturing workers ii. The average number of initial applications for unemployment insurance iii. The amount of new orders for capital goods unrelated to defense iv. The amount of new building permits for residential buildings v. The​ S&P 500 stock index vi. Consumer sentiment The average weekly hours worked by manufacturing workers is likely to be ________________ with real GDP. The average number of initial applications for unemployment insurance is likely to be __________________ with real GDP. The amount of new orders for capital goods unrelated to defense is likely to be __________________ with real GDP. The amount of new building permits for residential buildings is likely to be ___________________ with real GDP. The​ S&P 500 stock index is likely to be ___________________ with real GDP. Consumer sentiment is l

positively correlated negatively correlated positively correlated positively correlated positively correlated positively correlated

Classify the following examples based on whether they were ideas proposed by the Keynesian theory or by financial and monetary theories. Assume that there exists a downward wage rigidity. 1. Firm X expects a rise in the demand for their output in the​ future; they will increase their employment now. 2. A stock market rise in country B leads to an increase in consumer​ confidence, employment, and production. These events reinforce themselves and the virtuous cycle continues. 3. An expansionary monetary policy increases the money supply in country​ A, which in turn leads to a fall in the unemployment and a rise in real GDP. 4. Three major national banks of country Y​ fail, which ultimately leads to a fall in the​ country's real GDP and employment. 5. Country Z is in a recession. It will remain in this state until the government stimulates aggregate demand.

1. Keynesian 2. Keynesian 3. Financial / Monetary 4. Financial / Monetary 5. Keynesian

Suppose country X suffers from a recession. Identify the mechanisms responsible for labor​ demand's medium run recovery from the recession in the following examples. 1. A toy​ company's excess inventories get sold off. 2. Interest rates are lowered by 1.5 percentage points to attract investment. 3. The employees- of firms which had to shut down -find other jobs. 4. Corporate taxes in the country are decreased by 5 percentage points. 5. A rise in overall inflation due to an expansionary monetary policy raises the price of firm​ Z's cars. 6. Researchers develop a cheaper method of manufacturing steel.

1. Market forces 2. Government policies 3. Market forces 4. Government policies 5. Government policies 6. Market forces

​Keynes's theory of multipliers involved an element of the​ self-fulfilling prophecy. Which of the following illustrates the concept of a​ self-fulfilling prophecy? A. Firms expect an increase in demand in the future and so hire additional workers​ now, which leads to an increase in consumption demand. B. The Federal Reserve increases interest​ rates, which leads to lower business investment and hiring. C. The government expects a war to occur and so increases spending on military​ equipment, which leads to increased labor demand. D. Labor demand decreases due to a recession in Europe and a reduction in exports from the United​ States, which causes U.S. consumption to drop and thus leads to additional decreases in labor demand.

A. Firms expect an increase in demand in the future and so hire additional workers​ now, which leads to an increase in consumption demand.

What happens when the labor demand curve eventually shifts back out to the right as the economy starts to​ recover? Does the rightward shift in the labor demand curve raise​ wages? A. It does not raise wages until the labor demand exceeds its​ pre-pandemic level. B. It does raise wages until labor demand reaches its​ pre-pandemic level, then wages stabilize. C. It causes a decrease in wage rates until labor demand reaches its​ pre-pandemic level, then wages stabilize. D. It causes a decrease in wage rates until labor demand reaches its​ pre-pandemic level, then wages begin to rise.

A. It does not raise wages until the labor demand exceeds its​ pre-pandemic level.

What are the important mechanisms that reverse the effects of a recession in a modern​ economy? ​(Check all that apply​.) A. Labor demand increases due to expansionary government policies. B. Labor supply increases due to an increase in real wages. C. Labor demand increases due to market forces. D. The multipliers on wages and employment return to normal.

A. Labor demand increases due to expansionary government policies. C. Labor demand increases due to market forces.

Using your answer​ above, how does a​ pendulum-like structure contradict this property in economic​ fluctuations? A. Pendulums swing in an​ easily-measured rhythm that would make predicting fluctuations simple. B. Pendulums eventually come to a​ stop, which is not the case with an economy. C. There is no beginning or end to a pendulum​ swing, unlike with economic booms and busts. D. Unlike the​ economy, a pendulum has a maximum and minimum point that constrains the frequency of swings.

A. Pendulums swing in an​ easily-measured rhythm that would make predicting fluctuations simple.

Based on your graphical analysis what is the change in equilibrium employment and the change in the number of unemployed workers. A. The equilibrium employment level decreased and the number of unemployed workers increased. B. The equilibrium employment level increased and the number of unemployed workers decreased. C. The equilibrium employment level decreased and the number of unemployed workers decreased. D. The equilibrium employment level increased and the number of unemployed workers increased.

A. The equilibrium employment level decreased and the number of unemployed workers increased.

What does it mean to say that an economic fluctuation involves the​ co-movement of many aggregate macroeconomic​ variables? A. These variables grow or contract together during booms and recessions. B. Economic fluctuations in one period lead to movement of these variables in the next period. C. Real variables move in the same direction as the economic​ fluctuation, whereas nominal variables move opposite. D. These variables grow during booms and contract during recessions.

A. These variables grow or contract together during booms and recessions.

Which of the following statements correctly describe co-movements that are historically observed in the​ data? ​(Check all that apply.​) A. Unemployment moves negatively with real GDP. B. Real consumption moves negatively with real investment. C. Real consumption moves positively with real investment. D. Unemployment moves positively with real GDP.

A. Unemployment moves negatively with real GDP. C. Real consumption moves positively with real investment.

If​ oil, which is a major input to most production​ processes, abruptly jumps in​ price, the impact on the economy would be similar to​ ____________. A. a productivity decrease​, with a resultant decrease in real GDP. B. an economic multiplier increase​, with a resultant increase in real GDP. C. an economic multiplier decrease​, with a resultant decrease in real GDP. D. a productivity increase​, with a resultant increase in real GDP.

A. a productivity decrease​, with a resultant decrease in real GDP.

Contractionary monetary policy can lead to an​ economy-wide recession through​ ____________. ​(Check all that apply​.) A. a reduction in the price​ level, leading to a reduction in employment because of downward wage rigidity. B. a reduction in the real interest​ rate, leading to a decrease in production costs and therefore lower demand for labor. C. an increase in the price​ level, leading to a reduction in employment because of downward wage rigidity. D. an increase in the real interest​ rate, leading to an increase in production costs and therefore lower demand for labor.

A. a reduction in the price​ level, leading to a reduction in employment because of downward wage rigidity. D. an increase in the real interest​ rate, leading to an increase in production costs and therefore lower demand for labor.

An economic expansion begins​ ____________. A. at the end of a recession. B. at the midpoint between the trough and peak of GDP growth. C. after the peak of GDP growth. D. in the middle of a recession.

A. at the end of a recession.

According to his theory of animal spirits and​ sentiment, changes in sentiment cause economic fluctuations through​ ____________. A. changes in household consumption and firm investment. B. decreases in offsetting movements in exports and imports. C. changes in government expenditure. D. changes in productivity.

A. changes in household consumption and firm investment.

Real business cycle theory​ ____________. A. emphasizes the role of changing productivity and technology in causing economic fluctuations. B. explains how monetary factors drive business cycles. C. explains how initial economic shocks are amplified through the multiplier process. D. emphasizes the role of sentiments that create the​ self-fulfilling prophecies that drive economic fluctuations.

A. emphasizes the role of changing productivity and technology in causing economic fluctuations.

The recession of 2007-2009 affected the components of the national income identity by primarily affecting​ ____________. A. the C and I components through a reduction in consumer wealth and a drop in housing construction. B. all components of the national income identity equally in terms of percentage changes. C. the G component as the government attempted to offset the fall in demand through increased spending. D. the NX component due to an appreciation of the U.S. dollar and secondarily affecting the C and I components as consumers purchased fewer imports and businesses produced fewer goods for export.

A. the C and I components through a reduction in consumer wealth and a drop in housing construction.

During an economic downturn of any​ duration, _____________. A. ​consumption, investment, and GDP decrease while unemployment increases. B. consumption, investment,​ GDP, and unemployment all increase. C. consumption and unemployment increase while GDP and investment decrease. D. ​consumption, investment,​ GDP, and unemployment all decrease.

A. ​consumption, investment, and GDP decrease while unemployment increases.

​____________ used the concepts of animal spirits and sentiment to explain economic fluctuations. A. Arthur Cecil Pigou. B. John Maynard Keynes. C. Milton Friedman. D. Irving Fisher.

B. John Maynard Keynes.

When workers are laid​ off, what happens to physical​ capital? A. Physical capital becomes more​ productive, leading firms to increase capacity utilization. B. Physical capital becomes less​ productive, leading firms to reduce capacity utilization. C. Capacity utilization does not change. D. Laborers become more​ productive, leading firms to increase capacity utilization.

B. Physical capital becomes less​ productive, leading firms to reduce capacity utilization.

What market forces might cause the labor demand curve to shift back to the​ right? ​(Check all that apply​.) A. Wage rigidity decreases. B. Technological advances encourage firms to expand their activities. C. The banking system recuperates and businesses are again able to use credit to finance their activities. D. Excess inventory has been sold off.

B. Technological advances encourage firms to expand their activities. C. The banking system recuperates and businesses are again able to use credit to finance their activities. D. Excess inventory has been sold off.

Why do policymakers generally prefer to target low levels of inflation​ (e.g., 2​ percent) rather than zero​ inflation? A. To match the target unemployment rate. B. To limit the possibility of deflation. C. To limit the possibility of hyperinflation. D. To match the target GDP growth rate.

B. To limit the possibility of deflation.

An example of a multiplier is when​ ____________. ​(Check all that apply​.) A. a reduction in business investment is offset by increases in consumption and net exports. B. an increase in business confidence causes firms to increase production and hire​ employees, leading to an increase in household​ spending, causing firms to further increase production and employment. C. a drop in consumer confidence reduces household​ spending, causing firms to cut production and lay off​ employees, leading to a greater reduction in household spending. D. a decrease in labor demand with rigid wages causes a larger increase in unemployment than the same decrease with flexible wages.

B. an increase in business confidence causes firms to increase production and hire​ employees, leading to an increase in household​ spending, causing firms to further increase production and employment. C. a drop in consumer confidence reduces household​ spending, causing firms to cut production and lay off​ employees, leading to a greater reduction in household spending.

The national income identity shows that​ ___________. A. nominal variables are linked to real variables through inflation. B. output is a function of​ consumption, investment, government​ spending, and net exports. C. economic fluctuations are directly related to the movement of real variables. D. the growth rate of real GDP is inversely related to the unemployment rate.

B. output is a function of​ consumption, investment, government​ spending, and net exports.

The first ​Evidence-Based Economics in the chapter identifies three key factors that caused the recession of 2007-2009. How would​ Keynes's concept of animal spirits explain the creation of a housing​ bubble? A. With an expanding​ economy, real wages were driven​ up, leading to higher demand for​ housing, which expanded the economy further and drove up wages​ again, resulting in an upward spiral driven by optimism. B. Home builders reduced their level of construction and​ investment, which led to higher prices and profits due to decreased​ supply, and as inventory​ declined, prices continued to climb. C. People believed that a house was a worthwhile​ investment, which led to an increased demand for housing and thus pushed prices up. This confirmed to people that housing was a worthwhile​ investment, which led to more​ demand, resulting in an upward spiral driven by optimism. D. The increas

C. People believed that a house was a worthwhile​ investment, which led to an increased demand for housing and thus pushed prices up. This confirmed to people that housing was a worthwhile​ investment, which led to more​ demand, resulting in an upward spiral driven by optimism.

Which of the following characteristics of economic fluctuations does the Great Depression​ illustrate? ​(Check all that apply​.) A. Bank volatility. B. Stock market volatility. C. Persistence. D. Limited predictability. E. Co-movement in economic aggregates.

C. Persistence. D. Limited predictability. E. Co-movement in economic aggregates.

An example of a multiplier is when​ ____________. ​(Check all that apply​.) A. a reduction in business investment is offset by increases in consumption and net exports. B. a decrease in labor demand with rigid wages causes a larger increase in unemployment than the same decrease with flexible wages. C. a drop in consumer confidence reduces household​ spending, causing firms to cut production and lay off​ employees, leading to a greater reduction in household spending. D. an increase in business confidence causes firms to increase production and hire​ employees, leading to an increase in household​ spending, causing firms to further increase production and employment.

C. a drop in consumer confidence reduces household​ spending, causing firms to cut production and lay off​ employees, leading to a greater reduction in household spending. D. an increase in business confidence causes firms to increase production and hire​ employees, leading to an increase in household​ spending, causing firms to further increase production and employment.

The concept of multipliers was one of the key elements of John Maynard​ Keynes's theory of fluctuations. A multiplier is​ ____________. A. a change in productivity that leads to increases in aggregate economic activity. B. a factor that causes a change in the money supply to generate activity larger than the change in the money supply. C. an economic mechanism that causes an initial shock to be amplified by​ follow-on effects. D. a change in expectations about future economic activity.

C. an economic mechanism that causes an initial shock to be amplified by​ follow-on effects.

Economic fluctuations are​ ____________. A. changes to the trend line of GDP growth. B. economic shocks characterized by downward wage rigidity and multipliers. C. short-run changes in the growth of GDP. D. long-run changes in the growth of GDP.

C. short-run changes in the growth of GDP.

Using your​ graph, the most likely explanation for the shift of the labor demand curve is​ ____________. A. businesses need more workers with technological​ skills, and so push the overall labor demand curve to the right. B. businesses are optimistic about the future and so hire more workers. C. the increase in productivity increases the marginal product of​ labor, leading to an increase in labor demand. D. the increase in productivity decreases the marginal product of labor relative to the marginal product of​ capital, leading to the need to hire more workers to fully utilize the capital.

C. the increase in productivity increases the marginal product of​ labor, leading to an increase in labor demand.

An economic expansion is defined as​ ___________. A. a period of positive real GDP growth that is above the​ long-run average for the economy. B. positive real GDP growth lasting at least two quarters. C. the period between two economic recessions. D. a period of positive real GDP growth and unemployment below the rate dictated by​ Okun's Law.

C. the period between two economic recessions.

Early theories of business cycles assumed that economic fluctuations had a​ pendulum-like structure with systematic swings in economic growth. Which property of economic fluctuations do these early theories​ contradict? A. The inverse relationship of GDP growth and the unemployment rate. B. Co-movement. C. Persistence in the rate of growth. D. Limited predictability.

D. Limited predictability.

Which of the following variables exhibit​ co-movement during an economic​ expansion? A. Investment and consumption. B. Real GDP and employment. C. Inflation and government expenditure. D. Only A and B above. E. All of the above.

D. Only A and B above.

Which of the following statements correctly describes the consequences of considering real wages instead of nominal wages in analyzing​ recessions? A. We would find that real wages immediately adjust even in the presence of a downward wage rigidity. B. We would find that the conclusions of our analysis change. C. We would find that real wages​ can't fall if nominal wages​ don't. D. We would find that firms base their hiring decisions on the ratio of nominal wages to their output prices.

D. We would find that firms base their hiring decisions on the ratio of nominal wages to their output prices.

If​ oil, which is a major input to most production​ processes, abruptly falls in​ price, the impact on the economy would be similar to​ ____________. A. an economic multiplier increase​, with a resultant increase in real GDP. B. a productivity decrease​, with a resultant decrease in real GDP. C. an economic multiplier decrease​, with a resultant decrease in real GDP. D. a productivity increase​, with a resultant increase in real GDP.

D. a productivity increase​, with a resultant increase in real GDP.

An economic expansion begins​ ____________. A. when the unemployment rate bottoms out. B. in the month after the second consecutive quarter of positive real GDP growth. C. when real GDP growth first breaks above the​ long-run trend for the economy. D. just after the trough of a recession.

D. just after the trough of a recession.

According to the concept of persistence in the rate of​ growth, if the economy contracts this​ quarter, it will​ ____________. A. likely grow next quarter. B. definitely grow next quarter. C. definitely contract next quarter. D. likely contract next quarter.

D. likely contract next quarter.

According to​ Keynes's view on animal​ spirits, ____________. A. the economy will fluctuate in line with the underlying economic fundamentals. B. technological breakthroughs could cause rapid increases in output. C. downward wage rigidity could lead to pessimism in the​ economy, resulting in the​ self-fulfilling prophecy of a decline in economic output. D. the economy could fluctuate beyond the level that could be explained by the underlying economic fundamentals.

D. the economy could fluctuate beyond the level that could be explained by the underlying economic fundamentals.

As a new expansion in the business cycle​ starts, we can expect the aggregate labor demand curve to shift to the ____________. This will be met with ________________ in real GDP and a movement ______ the aggregate production function.

right an increase up

If an economic shock increases labor​ demand, equilibrium employment ____________ and real GDP ____________.

rises rises

If wages are​ flexible, the decrease in employment and real GDP will be _________________ the decrease if wages are rigid.

smaller than

If wages are​ flexible, the increase in employment and real GDP will be ___________ the increase if wages are rigid.

smaller than

Recessions and expansions have ___________ lengths, which explains why they ______________ a​ repetitive, easily predictable cycle. This is why there is _______________ of turning points.

variable do not follow a limited predictability